With its $4.2 billion purchase of Investors Financial Services Corp., State Street Corp. became the largest hedge fund administrator and the second-largest global custodian, its $12.3 trillion of assets under custody trailing only Bank of New York Mellon Corp.
But a top executive at the Boston company said it did not buy Investors Financial simply to keep pace as consolidation continues among trust banks.
"We are less concerned about how we are perceived versus BNY Mellon, JPMorgan Chase, or HSBC," Joseph L. "Jay" Hooley, a State Street vice chairman, said in an interview Thursday. "I want us to be positioned in growth segments of this business. We want to be positioned to anticipate and build our capacity for our customers' future needs."
Mr. Hooley, who also heads global investment servicing and investment research and trading, said State Street wants to continue to expand, but adding scale is not a top priority.
"Organic growth is our first preference, but we'll continue to augment that with acquisition opportunities," he said. "By order of priority, we want to expand in non-U.S. markets, and we also want to add product capabilities. … We want to continue to add scale, but that is really the lesser of our priorities, because we already have developed such significant scale."
State Street generated 43% of its revenue outside the United States last year, up 4 percentage points, but the Investors Financial acquisition dropped that back to 39%, Mr. Hooley said.
The company aims to get 50% of its revenue from foreign markets, he said.
"We are really way ahead in terms of percentage of revenue compared to our competitors," Mr. Hooley said. "We are really seeing faster growth in Europe and Asia, and we have people on the ground in every major market."
Other large trust banks also have set their sights overseas.
Robert P. Kelly, Bank of New York Mellon's chief executive, said in an interview with American Banker two weeks ago that its international business could generate half its revenue and earnings within five to 10 years, versus about 25% now.
Northern Trust Corp. of Chicago opened offices in Amsterdam and in Limerick, Ireland, last year. In the first quarter its global assets under custody rose 30% from a year earlier, to $1.8 trillion.
Geoffrey Bobroff, the president of Bobroff Consulting in East Greenwich, R.I., said "trust banks want to be able to maintain their position on a global basis rather than just here in the United States."
Many trust banks tested the international waters by forging joint ventures, but they will have to open more overseas offices if they want to generate more assets, Mr. Bobroff said.
"State Street's growth will need to come from elsewhere in the world," he said. "They are already such a dominant player in the U.S., it is going to be hard to move the needle much here."
Analysts said State Street paid a hefty price for Investors Financial — $65 a share, a 38% premium over the seller's closing price on July 2, when the deal closed, and 29 times its estimated earnings.
Mr. Hooley said State Street is confident that it paid a fair price for Investors Financial.
"In the trust banking world, there were very few remaining organizations that had the quality customer base, revenue, and earnings that Investors Financial offered," Mr. Hooley said. "Beyond the big three, there wasn't anyone else outside of Investors Financial that had its own, robust proprietary technology. Investors Financial was the premium property on the market, so the pricing may have looked high, but we don't mind paying for quality."
Mr. Hooley said State Street's conversion of Investors Financial's customers is ahead of schedule and he expects State Street to retain 90% of them. It has already retained all of Investors Financial's senior managers.
"We have a high degree of confidence in terms of retaining their revenue over time," he said. "Staff and client retention is tracking well." He said he expects to complete the conversion within the next 18 months.
In the meantime,, Mr. Hooley said, State Street wants to enhance its capabilities further.
"Ultimately, this acquisition wasn't just about scale," he said. "For us, this was an opportunity to buy a company that was focused on higher-growth segments.
"We were able to increase our penetration and market share in the hedge fund, private-equity, and offshore administration space, which are three of the fastest-growing segments of the global custody business."
Buying Investors Financial, also of Boston, nearly doubled State Street's hedge fund assets under administration and made it the largest hedge fund administrator globally, with $341 billion.
Investors Financial had $2.3 trillion of assets including $1.8 trillion held in custody.
"Investors Financial was a very attractive company, and it was attractive because it was very disciplined," Mr. Hooley said. "It didn't get into the pension space or areas that weren't that fast-growing."
Analysts said it could be some time before State Street goes after another large acquisition. Mr. Hooley did not disagree with them.
"When you think about a megamerger, you begin to realize that there are lots of risks in terms of execution and disappointing customers and not meeting earnings expectations," he said. "It is a pretty high-risk situation, and that is why a big acquisition isn't our strategy. We want to meet the needs of our institutional investors. That is our strategy."
Mr. Hooley said the Investors Financial acquisition will not stop State Street from expanding in other businesses.
He said that the company plans to further hone its administrative capabilities in the derivatives, hedge fund, private-equity, and real estate segments.
"There are always a handful of areas that we think are the future of investment management and could provide significant growth," he said. "It is in those areas that we want to continue to develop additional capabilities."
